Given today’s low interest rates, now is an ideal time to create a GRAT, which should sit at the top of any sophisticated estate planner’s list of gifting strategies.
The reason? While technically, GRAT stands for “grantor retained annuity trust,” a friendlier acronym might be “gift returns appreciation transfers.”
HERE IS HOW IT WORKS:
In forming a GRAT, you create an irrevocable trust, in which you retain control as the trustee and report income as the taxpayer on your personal returns. You can also structure the trust so that no gift tax return is required. You then decide what to put in, how long the trust should last and how often you will take annuity payments. The GRAT can hold anything: cash, public or private stock or real estate. Since your goal is to pay little or no estate tax, your advisor calculates the annuity amount by using the IRS’ published “applicable federal rate” (the “7520 rate”). You get the value of the gift back, along with what the IRS considers a fair rate of return. If you outperform the IRS rate, your children receive the “upside.” In sum, you can potentially make a gift that, for tax purposes, is not a gift at all.
HERE IS WHY IT WORKS NOW:
As noted, interest rates are low and not expected to rise significantly in the short term. The IRS assumes an interest rate of 1.4 percent for September 2016 that remains fixed during the GRAT term. If you think you can achieve a greater return over, say, the next five, 10 or 20 years, then you should consider funding a GRAT immediately. If you’re a pessimist, a GRAT might seem a useless drafting expense should you die during the term, or values drop so much that you get back everything and nothing passes to your children. Yet, even with these possibilities, there is still no adverse tax consequence.
Set up a GRAT today; you’ll be freezing your net worth and shifting appreciation to the next generation and beyond.
If you’re an optimist, the GRAT offers you the satisfaction of knowing that your children are receiving wealth while you can watch and guide them. And, of course, you’ll have the joy of doing that while paying little or no gift tax.
HERE IS WHAT YOU CAN EXPECT:
The successful GRAT allows you to preserve your gift, estate and generation-skipping tax exemption on wealth transfers. Consider that most high net worth families have used up these exemptions and face a 40 percent tax on any future transfer.
With a GRAT, however, as wealth appreciates in the hands of an older generation, the IRS becomes a partner in this added value. So, set up a GRAT today; you’ll be freezing your net worth and shifting appreciation to the next generation and beyond. The time is right to GRAT now.
DISCLAIMER: The information presented in this publication is made available for general purposes and is not legal advice nor is it intended to be acted upon as legal advice. There is no attorney-client relationship created between the reader and White Law or any of its representatives. The content of this publication may be changed, improved or updated without notice. The reader should seek a qualified attorney licensed to practice law in the relevant state or jurisdiction with respect to addressing any particular issue or idea raised in this publication.
This article was originally published in the October/November 2016 issue of Worth